Scene: Jordan’s office with Matt, reporter for major publication. Matt has been asked by POTUS’ office to help write the story of GM. POTUS wants to use the information as part of a plan to help rebuild US manufacturing. Entries about GM begin #41.

Matt: “I’m really surprised there was not more support inside GM for the EV1 (electric vehicle). I mean, people must have been aware of all the positive media coverage.” Jordan: “The lack of support within GM was virtually everywhere.”
Matt: “I really don’t understand. Why?”
Jordan: “The problem was two-fold. One, the car divisions – Chevrolet, Buick, etc. — had experienced 10 years of Roger Smith diverting funds that should have been used for product programs.”
Matt: “Funds for buying Hughes, buying EDS, buying out Ross Perot for $700, and then starting Saturn division. So the EV1 comes along and all the divisions think more product development dollars are being diverted to some low volume, goofy-looking electric car. I can understand why they did not support it.”
Jordan: “The divisions might have supported it if they understood the potential value.”
Matt: “What do you mean? It was an electric vehicle. What value is an EV to say Buick or Cadillac?” Jordan: “EV1 qualified as what one could call a ‘halo’ car. A halo car helps improve the image for the company.”
Matt: “Which in turn increases the number of people who might consider buying a car or truck from the company, not just the halo car.”
Jordan: “Grocery stores have specials to get people in the door. The halo cars do the same for auto dealerships. Corvette is a halo car for Chevrolet. Viper for Chrysler. You get the picture.”
Matt: “But the ‘halo’ message never got across…at least inside the company.”
Jordan: “Here’s where I need to take some blame. The EV1 marketing effort focused almost 100% outside GM. We assumed…erroneously…that people inside the company understood the value of EV1.”
Matt: “How widespread was the misunderstanding, even resistance, inside GM? The divisions, yes. What about the staff?”
Jordan: “Funny story. More tragic than funny but I think representative of the problem.”
Matt: “Ok, what happened?”
Jordan: “The EV1 group had its own government relations staff, which reported to me.”
Matt: “Was that unusual?”
Jordan: “Within GM, yes. We were the only group with a separate government relations staff. All other government relations efforts had to be channeled through corporate staff.”
Matt: “Mmm, interesting. A bit of friction there?”
Jordan: “Some but I think the real problem was a perceived difference in function.”
Matt: “Not sure I understand.” Jordan: “An example. I’m having lunch one day with the chief environmental lobbyist for GM – just the two of us. He leans across the table and says, ‘You are my worst enemy.’”
Matt: “An odd statement. What did he mean?”
Jordan: “That’s what I wanted to know. So I asked why.”
Matt: “And?
Jordan: “He said his primary task was to convince federal and state legislators to overturn tailpipe emissions laws that were too strict for the auto companies to meet. And since I was out there promoting an electric vehicle with no tailpipe emissions. My efforts were proving him wrong.”
Matt: “Did he want you to stop?”
Jordan: “Yes. Then I asked who was signing his paycheck. I told him our group worked directly for the chairman and until I was told to do otherwise, I was going to promote the zero emission EV1.”
Matt: “Now I see what you mean about internal misunderstanding and friction.”
Jordan: “The real resistance was at the operating divisions.”
Matt: “They were still smarting over the diversion of funds.”
Jordan: “I can’t blame the divisions for lack of support. Product program funds had been diverted for the Squeaky’s boondoggles. Matt, at the same time the CEO says the company policy is to increase earnings and not be concerned about market share.”
Matt: “And for 75 years the divisions and dealers have focused on market share. Isn’t achieving certain market share a key part of the dealer franchise agreement?”
Jordan: “It was then and I assume so now. “
Matt: “No wonder the divisions were in a sour mood about EV1. What about the US economy? Wasn’t it starting to slow down about the same time?” Jordan: “Yes, for lots of reasons. Plus the savings and loan scandal disrupted the financial markets for a while.”
Matt: “Sounds like the perfect storm.”
Jordan: “It was not the same storm as in 2008 but things were not good.”
Matt: “You said part of the problem was not educating the staff inside GM on the value of the EV1. Tell me more of what you mean.”
Jordan: “What the EV1 group did not promote was the spin-off benefits.”
Matt: “Such as?”
Jordan: “While the EV1 was in development, engineers at Delco were taking components and testing in gasoline cars.”
Matt: “You mean integrating some of the electronic features from EV1?”
Jordan: “Exactly.”
Matt: “Who knew about such programs? I’ve never heard anything about it.”
Jordan: “I don’t think many people knew, even many GM executives.”
Matt: “But why? Seems like a good idea.”
Jordan: “Part of the problem was GM and the other auto companies were suing the state of California over laws requiring zero-emissions vehicles, aka ZEV’s. One of GM’s arguments was cost for developing EV’s was too high.”
Matt: “The argument goes away if development costs are spread over say 4-5 million cars and trucks versus say 25,000 EV’s.”
Jordan: “Absolutely. Take say $250 million development costs for the EV1. If you spread out development costs over GM production for 5 years – about 25,000,000 cars and trucks – the cost is $10 per car. The same $250 million over 5 years of EV1 sales – remember the forecast was about 5,000 per year – development cost comes to $10,000 per car.”
Matt: “So GM knows it will lose its argument for the lawsuit if it promotes using EV1 components in all its cars and trucks.”
Jordan: “Another case of back asswards thinking. Why not promote the value of the EV1 as helping all cars and trucks?”
Matt: “Senior GM management apparently did not understand the value of what it had developed.”
Jordan: “Unfortunately, EV1 suffered from the same problem as the boy who cried wolf’ too often. When the real wolf came no one believed him.” Matt: “No one believed him but it was true. But wasn’t Bob Stempel chairman by now?”
Jordan: “Yes, but he was fighting the financial staff who looked only at the bottom line. Remember the financial guys were part of Squeaky’s cadre, and not loyal to Stempel. In fact, many in the EV1 group considered the CFO as a spy.”
Matt: “Not a good scene. Let me summarize. What I want to do is translate the events into al lesson POTUS can use to help explain how to rebuild US manufacturing.”
Jordan: “For me the simplest lesson is educating people inside the company is as important…maybe more important…than educating people outside the company.”
Matt: “Another lesson is to look beyond the obvious. Making lemonade out of lemons. GM kept claiming costs for the EV1 were excessive but in fact, could have been spread over many carlines.”
Jordan: “If you think about the cost of the EV1 – use $250 million – and take a look at the positive media coverage that was generated about GM, the development cost becomes inexpensive advertising.” Matt: “But the financial group would not recognize the value of positive image?”
Jordan: “Never. To them EV1 was only a cost program. Virtually none of the financial guys had any experience in marketing.”
Matt: “So the lesson is to implement a more holistic approach to value creation and not just look at cost.”
Jordan: “Matt, great way to end this session.”

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2 thoughts on “#52 Value of GM EV1: Holistic Cow”

As an outsider looking in, I have to wonder why development costs were not absorbed as part of a GM general R&D budget and not take money from any division product development? Did such an R&D department exist? Why wasn’t the EV 1 project promoted internally by the CEO? If he is going to allocate time and money, he should be able to justify it to the BOD and staff. My guess is disruptive technology is always looked upon as a negative influence to business as usual. Until there is a compelling reason to embrace the technology, it is better to fight it off and keep doing what was always done.

Getting any company to adopt a disruptive technology is very difficult. One of the first empirical studies of the barriers was done by James Utterback, professor at MIT. Book was titled “Mastering the Dynamic of Innovation.” Utterback notes how very few companies are able to transition from an existing technology to the disruptive technology. A good read for the reasons why is “The Innovator’s Dilemma,” Clay Christensen. Both Harvard Business School Press.

Although Stempel was CEO and strongly supported the EV1, as I tried to point out in the blog there was (i) resistance from the car divisions, in large part because product development resources had been diverted to pet projects of Roger Smith and (ii) resistance from the GM financial staff about spending capital on such a low-volume model.

Recent disclosure of how GM was driven by cost control at the expense of safety (ignition switch, e.g.) highlights the resistance Stempel faced in getting the EV1 to market. Despite all the positive PR generated by the program, the Board of Directors was not fully supportive. As I hope is clear, successfully adopting disruptive technology requires as much, if not more education inside the company, than outside. Our group did not appreciate fully the amount of education required inside the company. The benefits were not obvious.